rssBigger Than Detroit
Wednesday, November 19, 2008 at 1:01 pm
- 34 Comments
Senate Banking Committee Chairman Christopher Dodd (WDCpix)
More than 50 years ago, when the head of General Motors said that what’s good for General Motors is good for America, few would have disagreed. But Tuesday, the company’s CEO couldn’t convince a panel of 21 senators that the idea still rings true.
Along with the heads of Ford and Chrysler, Rick Wagoner urged senators to lend $25 billion in emergency aid to the three teetering auto makers. Without that help, the executives warned, one or more of the companies could fail. GM says that it’s burning through cash at a rate that could drive it under before Christmas. The economic effect of the car manufacturer’s collapse, the executives claimed, would reverberate far beyond Detroit.
Illustration by: Matt Mahurin
“The costs would be catastrophic in jobs lost, income lost, government tax revenue lost and a huge blow to consumer and business confidence,” Wagoner testified before the Senate Banking Committee. “This is all about a lot more than just Detroit. It’s about saving the U.S. economy from a catastrophic collapse.”
While the debate focuses on Detroit’s auto makers, the issue, some experts say, is nothing less than the future of U.S. manufacturing — and the nature of the country’s workforce as a whole.
Thomas Geoghegan, a Chicago labor lawyer, said the failure of any of the Big Three would signal a cultural shift, signifiying the fall of the United States as the world’s premier industrial powerhouse.
“It would be a dramatic marker in what has been a very slow collapse of the U.S. as a manufacturer,” he said.
Geoghegan, who has represented labor unions, said he supports a bailout of Ford, GM and Chrysler — with reservations. If the proposal is part of a renewed government commitment to get the country manufacturing again, he said, it would be worth it. “Otherwise,” Geoghegan said, “it’s probably just a waste of money.”
Many leading economists say an injection of capital is worth the risk. Appearing Sunday on ABC’s “This Week with George Stephanopoulos,” Paul Krugman, the Nobel Prize-winning Princeton economist and New York Times columnist, warned that allowing the automakers to fail would jeopardize every other stimulus package and bailout bill Congress has passed this year.
General Motors CEO Rick Wagoner (gm-volt.com)
“Letting GM go under is an enormous anti-stimulus policy,” Krugman said. “It would be working toward a major negative blow to the economy.”
Many Democrats tend to agree. Party leaders have introduced bills in both the House and Senate to use $25 billion from the $700-billion Wall Street rescue plan to prop up the sinking automakers. The money would cover the companies’ operating expenses, including wages, auto parts, health care and pensions. More important, supporters say, it would keep them making cars and trucks.
“We need this industry as a basic part of the fabric of our economy,” insisted Sen. Debbie Stabenow (D-Mich.), an ardent industry defender. “Somebody has to make something in America. Credit default swaps alone, moving paper, aren’t going to do it.”
Standing in the Democrats’ way are the White House and many Senate Republicans, who oppose tapping the Wall Street rescue fund to help Detroit.
“That money is specifically for the financial industry,” White House spokeswoman Dana Perino said Tuesday, “to help prevent collapse in our financial system.”
Republicans want Detroit to tap a $25 billion fund, passed in December, to help the automakers retool their factories to improve their fleets’ fuel efficiency. Republicans appear to have the numbers to kill the Democratic bill this week.
Sen. Chris Dodd (D-Conn.), chairman of the Banking Committee, gave a stormy forecast Tuesday for the bailout’s chances in the Senate. “I would like to tell you that, in the next couple of days, this is going to happen,” Dodd told the industry heads. “I don’t think it is.”
The golden days of the American automobile industry are long gone. (Flickr: califrayray)
Much of the debate centers on ideology. Republicans, already stinging from government interventions to keep the financial system working, want market forces to determine the fate of the Big Three.
“Do the American people want to borrow from their children to prop up companies that are dinosaurs, that have failed models, that have no innovation to speak of, just to hold jobs?” Alabama Sen. Richard Shelby, the highest-ranking Republican on the Banking Committee, told CNN Monday. “The government is choosing winners and losers in the marketplace. It won’t work.”
Many critics of a bailout have suggested that bankruptcy is the answer for the struggling automakers. That, they contend, would allow the industry to continue producing vehicles — and keep employees in jobs. As an example, they point to the case of United Airlines, which operated under Chapter 11 bankruptcy protection for much of this decade.
But others see a series of pitfalls with the bankruptcy strategy. One is that consumers might be leery of buying cars from a bankrupt automaker. “What’s a five-year warranty worth if the company that produced the car might not be around next year?” asked John Schmitt, senior economist at the Center for Economic and Policy Research.
A bankruptcy in the airline business is different, Schmitt claims, because travelers tend not to care much about the long-term financial health of their carrier. “They may not be around two years from now,” Schmitt said, “but they’ll certainly be flying to Cincinnati this afternoon.”
There are other concerns with the bankruptcy option. Generally speaking, a company files Chapter 11 when reorganizing the business is thought to be more profitable than closing shop altogether. In the case of the auto makers, however, the revamping could have little effect if credit markets don’t finance the reorganization or the purchase of new cars. Even if GM were producing 1,000 Chevy Volts (the company’s plug-in hybrid) every minute, Americans couldn’t scoop them up if they couldn’t obtain credit.
“Chapter 11 quickly becomes Chapter 7,” Krugman said on “This Week, “which is liquidation. So we actually see the thing disappear.”
Such a failure could result in the loss of hundreds of thousands of jobs nationwide, experts predict. Susan R. Helper, economics professor at Case Western Reserve University, estimates that 500,000 jobs would be lost if just GM — as well as the companies that supply it exclusively — were to shut down. Faced with numbers like those, she said, a $25-billion investment would be well worth the risk. “The advantage of keeping jobs in a recession is pretty clear,” Helper said.
On one facet of the debate, all sides agree: It’s been a tough ride recently for Detroit’s automakers. Faced with slumping sales because of the credit crisis, the Big Three are burning through their cash at a breakneck pace. In the third quarter of this year, GM rifled through $6.9 billion, while Ford spent $7.7 billion and Chrysler $3 billion. On Tuesday, as the corporate heads were testifying before Congress, Ford’s stock price fell 4 percent, and GM’s nearly 3 percent, to lows not seen in decades.
The performance of the companies has led many bailout critics to wonder aloud why anyone would want to save them. “People who say General Motors is too big to fail have not noticed that it has failed,” conservative commentator George Will said Sunday on “This Week.”
The industry hasn’t done much to help its cause. After years fighting fuel-efficiency standards that might have made the Big Three more competitive in these lean times, the companies were quick Tuesday to attribute their troubles largely to the bad economy, not misguided internal decision-making. Meanwhile, foreign companies like Honda and Toyota are years ahead of Detroit in developing smaller, more efficient engines.
Many in Congress — even supporters of the auto bailout — doubt $25 billion will be enough to get the companies through the recession. “You’re asking an awful lot,” Dodd told the company heads at the end of Tuesday’s hearing. “And I suspect … that this $25 billion is not going to be the end of it.”
34 Comments
Comment posted November 19, 2008 @ 1:19 pm
“It would be a dramatic marker in what has been a very slow collapse of the U.S. as a manufacturer,” Thomas Geoghegan said.
And what? Like GM and Ford sending almost all of their manufacturing jobs to other countries wasn't already a dramatic enough marker?
These three need to get off their high horses and get back to the end of the line like the rest of us.
Comment posted November 19, 2008 @ 10:01 pm
Those of us working in the auto industry at dealerships such as myself, where do we go when the collapse happens? Will we ever work again? Or will it be just at McDonalds? No more middle class jobs. The first thing I will do is go bankrupt and then go on medicare and just end up sucking from the government.
Comment posted November 20, 2008 @ 8:50 am
I I think if we could bail out the Corporate Greed experts,we can bail out the auto industry which,if it goes down will bring about 250 thousand jobs with it..if a Wall Street hot shot loses his job..ask me if I care..since they are being rewarded by Hank Paulson for doinf a lousy job! We won't be rewarding the big 3 guys,we will be saving the jobs of working people.Why is it the Congress was so hard on the 3 auto execs and so gentle with the thieves from AIG??
Virginia A Wolf ,Willingboro New Jersey
Comment posted November 20, 2008 @ 8:54 am
The Auto Industry will get off its high horse when AIG and all the other THIEVES on Wall St. get off theirs!
Why is it OK for Paulson's friends on the Street to get $$ and MISUSE it? But we can't save workers' jobs?
It's the same old story..the Republicans have always sucked arounfd the rich!
Comment posted November 20, 2008 @ 10:59 am
For those GM employees concerned about their retirements don't fret the Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of nearly 44 million American workers including those at GM.
The only problem is that the taxpayer is the Pension Benefit Guaranty Corporation. Keep GM and its employees working or pay for their retirements.
Comment posted November 20, 2008 @ 4:01 pm
If the big 3 fail, will the supply of vehicles into the market not be provided by Toyota and other manufacturers (Hyundai, Honda, BMW etc) based in the US? These companies seem to be doing well in the US and would probably expand if Foord and co were to go under.
But the thought of so many good people out of work is truly devastating. Amid all the clamor, I hear little of the successful US based manufacturers.
Comment posted November 21, 2008 @ 11:59 am
O.K. the big 3 come up with a new business plan and Congress responds with a $25 billion load. What then? If the financial system doesn't free up money for loans (they got $300 billion, remember?) the big 3 will go down. We can produce all of the manufacturing products imagianable but if consumers have no money to purchase these goods, we're still in trouble. The economy, with all of it's problems, is a big system and SOMEONE needs to stop this shotgun approach to solving individual problems and look at what's best for the big picture. My advice is a bottom up approach – help the consumers with jobs, health care, mortgages and I bet the outlook improves.
Comment posted November 21, 2008 @ 12:25 pm
That is true, regarding the imports…but that is the key word…..imports…keep the US manufacturer going….the problem here is the UAW, it is bleeding the Big 3 dry, the avg worker at the import plants(non union) makes 28.00 per hour and when was the last time they had labor issues….the avg UAW worker 70.00+ per hour and when the plnat suspends the line and sends the workers home they still get paid….it seems whenever they go on strike they get more and more and more…
Comment posted November 21, 2008 @ 12:33 pm
Check into what the UAW has done to the big 3….they are supported by the Democrats…
they get paid more than double thatn what the worker at the Toyota/Honda plant get for doing the same thing and even get paid when the plant closes early when the line is stopped to contol output….. The UAW is a big part of the problem….actually it is a huge part of the problem
This is a problem caused by Washington all together on both sides of the fence, it started with the collapse of the available credit, for which the automotive business is structured around….buying and selling of paper, buying and selling of rates etc…..the mortgage crisis is a result of the Clinton administration, “Clinton admitted that himself”, it seemed like the right thing to do at the time he said…getting nonqualifying people into mortgages that is..
The big 3 more specifically had a HUGE roll in bailing the US economy out after 9-11 now it is time to help a company(companies) that have helped build this country….this cannot be a windfall or a gift, it has to be a short term loan under strick control…
Comment posted March 4, 2009 @ 10:01 pm
The dilemma is the domestic's work costs are still based on the standards only made achievable by monopoly power.
However does anybody sincerely consider this car bailout is regarding liquidity?
Comment posted May 15, 2009 @ 2:02 am
For the Big three, they should stop pushing thousands of vehicles out every year when they still have the previous models on the lot.
Comment posted June 5, 2009 @ 1:18 am
I am really not into Auto Bailout. We should not reward poor management, negotiation and decision making. Lets face it, The Big Three lacks creativity.
Comment posted June 5, 2009 @ 8:18 am
I am really not into Auto Bailout. We should not reward poor management, negotiation and decision making. Lets face it, The Big Three lacks creativity.
Comment posted August 23, 2009 @ 5:57 am
Will we ever work again? Or will it be just at McDonalds? No more middle class jobs. The first thing I will do is go bankrupt and then go on medicare and just end up sucking from the government.
Comment posted April 27, 2010 @ 5:19 pm
In the meantime, GM says that the decision to reverse terminating 661 dealerships, and possibly more, could lift market share. payday loans canada
Comment posted April 27, 2010 @ 9:06 pm
The first thing I will do is go bankrupt and then go on medicare and just end up sucking from the government.
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Comment posted August 1, 2010 @ 1:09 pm
I am really not into Auto Bailout. We should not reward poor management, negotiation and decision making. Lets face it, The Big Three lacks creativity.
Comment posted September 3, 2010 @ 5:01 am
The performance of the companies has led many bailout critics to wonder aloud why anyone would want to save them. “People who say General Motors is too big to fail have not noticed that it has failed,” conservative commentator George Will said Sunday on “This Week.”
Comment posted September 4, 2010 @ 9:23 am
If the big 3 fail, will the supply of vehicles into the market not be provided by Toyota and other manufacturers (Hyundai, Honda, BMW etc) based in the US? These companies seem to be doing well in the US and would probably expand if Foord and co were to go under.
Comment posted September 17, 2010 @ 12:54 pm
A bankruptcy in the airline business is different, Schmitt claims, because travelers tend not to care much about the long-term financial health of their carrier.
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Comment posted September 30, 2010 @ 9:27 am
“Chapter 11 quickly becomes Chapter 7,” Krugman said on “This Week, “which is liquidation. So we actually see the thing disappear.”
Comment posted October 16, 2010 @ 12:42 pm
yes i see what you mean here and this is right
Comment posted November 12, 2010 @ 3:06 pm
yes i see what you mean here and this is right
Comment posted November 26, 2010 @ 5:05 am
issue Underlying Auto Bailout Is the Future of U.S. Manufacturing.
who knows??
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